I am an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, I serve on the Board of Directors for the Bitcoin Foundation.

CoinLab Attracts $500,000 in Venture Capital for Bitcoin Projects

In the first official venture capital raise for a direct investment in bitcoin, CoinLab secured $500,000 today from seed stage Silicon Valley firm Draper Associates and others, including Seattle angel investor Geoff Entress, former assistant treasurer at Microsoft Jack Jolley, and familiar bitcoin investor Roger Ver. Jolley will also join the company as its Chief Financial Officer.

Based in Seattle, CoinLab is an emerging umbrella group for cultivating and launching innovative bitcoin projects. Until now, they have been relatively quiet regarding their initiatives but they are credited with releasing a comprehensive Bitcoin Primer in January 2012. The founders are startup entrepreneurs Peter Vessenes, Mike Koss, and Tihan Seale, each with a strong passion for the broad advancements enabled by a decentralized currency.

Peter Vessenes and Mike Koss (Erynn Rose photo)

CEO Vessenes said, “if there is a currency that can trade around the world, it’s semi-anonymous, it’s instant, it’s not controlled by government or bank, what’s the total value of that currency? The answer to that is, if it works, it’s gotta be in the billions. It just has to be for all the reasons you might want to send money around the world.”

Apparently, seasoned investors are starting to agree. Draper Associates partner Tim Draper explains the allure of the decentralized bitcoin, “The idea of a private currency has always been appealing to me as a way to diversify away from holding currency in irresponsible governments. It is more relevant now than ever.” Hopefully bitcoin will maintain its current exchange value and appreciate, especially since this investment represents over 1% of the total $45 million worth of existing bitcoin in the world.

CoinLab intends to go into serious hiring mode as they build out their development team and launch new bitcoin projects. Although an SMS bitcoin texting service called Bitsent was announced briefly on their site, a greater focus has been on the concept of MMORPG mining, leveraging bitcoin to monetize players for the online gaming companies like World of Warcraft and EVE Online. Two companies have already agreed to participate in a beta for the CoinLab mining concept — Wurm Online, an independent MMO that allows players to dig, flatten, raise and shape the land and create the frontier world they live in, and graFighters, the first online fighting game for your hand drawn characters.

The business model is clever. A few whales, or big spenders on virtual goods, make up the majority of gaming company revenue while the infrequent casual players constitute the bottom 10%. “CoinLab wants to grab that 80% in the middle,” says Vessenes. They intend to accomplish this by offering a configurable app that players download from the gaming site which would allow bitcoin mining jobs to run on these beefy GPU-outfitted client computers.

Like DropBox, the CoinLab app will reside in the background so that the players are not even aware of the mining that occurs during the gaming session. To the gamer, certain virtual items or level upgrades would be obtained. This is a new revenue stream for online game companies as they monetize the free-to-play gamers via cluster compute work and a win for CoinLab as they convert the mined bitcoin to dollars or euros that are passed on to the companies after a tidy spread of course.

Vessenes doesn’t want to refer to CoinLab as ‘just another mining pool’ because they have a distinctly different type of payout, but you can certainly imagine some non-gaming miner opportunities entering the CoinLab platform. After all, bitcoin miners and the mining pools collectively gain clout by virtue of the fact that a majority of miners is necessary to accept changes and slight variations to the protocol. It is easy to view the bitcoin mining pools as guardians of the free and open monetary system of the future — powerful de-central bankers if you will. CoinLab is poised to earn a seat at that table.

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As an aside, Neal Stephenson (sci-fi author) has a book that illustrates a similar MMORPG based mining operation to that described: Reamde. See here: http://www.amazon.com/Reamde-A-Novel-Neal-Stephenson/dp/0061977969

I’d have to say that this is probably a bad investment. It won’t scale due to the very nature of Bitcoin mining.

Bitcoins are generated at a locked in, set rate of 7200/day. The more computing power you throw at bitcoin mining, the tougher the algorithm becomes. CoinLab and the other mining pools are all fighting for a percentage of this pie. The pie does not get any bigger. So if CoinLab sees a spike in growth and has 1000% more computing power to be mining with, they will NOT see 1000% more revenue.

Their partners, the game developers, will see their payments fall as this system becomes more successful. Not a good way to keep your partners happy.

Now the idea of using gamers GPUs to solve problems while they are playing free games as a method of “paying” for those games is a good one. Mining bitcoins is a good proof of concept for a system like that. But it’s not going to be enough of a revenue stream to get the VCs their hoped for 10x payout.